Kwasi Kwarteng: After a pantomime Pre-Budget Report, serious steps are needed to cut taxes and spending
Kwasi Kwarteng was Conservative Candidate for Brent East at the General Election of 2005, Chairman of the Bow Group in 2006 and a candidate for the London Assembly in 2008. He holds a doctorate in Economic History from Cambridge University, has worked as an investment analyst, and is currently writing Ghosts of Empire, a book about the international legacy of the British Empire.
It’s only two weeks before Christmas, so my mind takes me back to Christmases when I was a child. I loved pantomimes and I remember the various fairy tales and children’s stories; Jack and the Beanstalk, Dick Whittington, that kind of thing. And Alistair Darling’s effort on Wednesday afternoon reminded me of another pantomime which some people may not have seen. It went something like this...
In a distant kingdom, far away, there was an old king who had two sons. The first son was slow of body and mind, a dull plodder. The second son, from a second marriage, was 15 years younger. He was a free spirit who enjoyed travel and speaking to learned men from all over the kingdom and beyond.
The old king was constantly fighting wars and ran up huge debts. He kept a very lavish household, which was run by unruly barons. He had dozens of cooks, almoners, chamberlains, jugglers and falconers. It was a very extravagant court. The wars he fought were also expensive. The kingdom seemed to be fighting constantly and the cost of running the household and fighting at the same time became very high.
As the king approached his eightieth year, he realised that he was not going to live much longer, so he called his sons to his bedside and said, “I have done my best to keep the kingdom strong, but, as you can see, I have run up huge debts and leave you a bad inheritance: the treasury is empty and foreign money lenders are pressing to be repaid. As is our custom, I will leave each of you half of my kingdom, and each of you will have to govern your part in the way you see fit”.
The king died a few days later. The elder son took over the eastern part of the kingdom, while the younger brother took the western part. The household was split equally in two. The debts were equally split.
The older brother continued to pay for his household. He couldn’t resist the barons of his court. They all continued living in the same lavish style. Everyone wanted to carry on as before. The older brother decided to increase the taxes of the rich merchants. They were unpopular and so no one cared. Then he started to increase taxes for the tradesmen, the middle earners, to pay for the lavish court. These people continued to work hard, but they kept less and less of their money. They were working simply to keep up the lavish court. Many simply left the kingdom or gave up work.
Meanwhile, the younger brother decided to tackle his court. He made himself unpopular with his barons. He got rid of many of the cooks; he cut back on the falconers and almoners. He lived more frugally. He believed the only way that the country could afford to pay the debt was by becoming wealthier. The only way the burden of debt could be lightened was by making the kingdom, as a whole, more able to bear it. The younger brother cut taxes to increase incentives. People from the hard-pressed East came to his kingdom of the West, where they were given tax holidays and encouraged to pursue the trades they had left behind.
After ten years, the Eastern kingdom was a pretty grim place. People had little incentive to work. They simply got by. The barons were still living high on the hog, as the court consumed ever greater amounts of the kingdom’s wealth. The debt never went away.
The Western kingdom was a hive of activity. New businesses had been set up. The court had been cut back, but the country prospered, as new merchants employed many of the cooks and falconers that the young king had dismissed. The country was busy and prosperous; the people were more contented. The burden of debt seemed to have disappeared, and money flowed into the treasury.
It was a fun, and highly instructive, Christmas pantomime.
Of course, people might say, this is just a fairy tale. Yet the broad message of the story is relevant to Britain today.
The total national debt is £1.5 trillion, more than the entire output of the nation in a year. I noticed that the forecast in 2004 was for the national debt to be £574 billion in 2009/2010. In other words, our debt is about three times bigger than Labour anticipated five years ago.
Any long term recovery will depend, almost exclusively, on the creativity and entrepreneurial spirit of individuals and companies. It is the job of government to stimulate these by giving them incentives. The ultimate incentive is to allow individuals and corporations to keep more of the money they earn.
Our plan to cut corporation tax from 28% to 25% is a step in the right direction, but I agree with Lord Forsyth who suggested that the cut should be more aggressive, to 20%. Income taxes should not be raised.
Tax cuts are the easy part.
The second thing that the young king did in the story was to tackle his extravagant court. This, of course, is much harder politically. Our modern barons are powerful and articulate. They also vote in large numbers. Yet courageous steps will be needed to address our spending. This is will be a real test of statesmanship for the next Prime Minister and Government.
No-one said that this was going to be easy to implement politically, but at least a Conservative solution is clear enough.